MARCH 2021 Farming Smarter Investing in our future ABOUT THE AUTHORS About the authors TONY GREENHAM Tony is a senior fellow of the Finance Innovation Lab and was previously director of economics at the RSA and the head of finance and economics at the New Economics Foundation. His publications include ‘People Powered Prosperity: Ultra Local Approaches to Making Poorer Places Wealthier’, ‘Where Does Money Come From? A guide to the UK monetary and banking system’ and ‘The British Business Bank: Creating good sustainable jobs’. Tony’s early career was in the City as a chartered accountant and investment banker with Barclays and Credit Suisse. He is currently the executive director of South West Mutual, a regional mutual challenger bank serving the south west of England. Tony has a MSc in Environmental Assessment and Evaluation from the London School of Economics and a BA in Philosophy, Politics and Economics from the University of Oxford. DUNCAN McCANN Duncan is a senior researcher with the New Economics Foundation. As part of the Economy team he has published numerous papers on the subject of money and banking including ‘Financial System Impact of Disruptive Innovation’, ‘People Powered Money’ and ‘Seigniorage in the 21st Century’. Duncan’s work focuses on using innovative institutions and policy to ensure that complex systems meet the needs of people and the planet. Duncan holds a law degree as well as a postgraduate certificate in the Circular Economy. LAURIE MACFARLANE Laurie is an economist whose research focuses on state investment banks and patient finance. He is currently a fellow at the UCL Institute for Innovation and Public Purpose (IIPP) and Economics Editor at openDemocracy. Prior to this he was senior economist at the New Economics Foundation. Laurie is also a trustee of the Finance Innovation Lab and a research fellow at The Democracy Collaborative and the Wellbeing Economy Alliance. He also sits on North Ayrshire Council’s Community Wealth Building Expert Panel and the Progressive International’s COVID-19 working group. Laurie is co-author of the critically acclaimed book ‘Rethinking the Economics of Land and Housing’. FARMING SMARTER INVESTING IN OUR FUTURE | MARCH 2021 2 FOREWORD Foreword In our 2019 report, ‘Our Future in the Land’, we made three sets of recommendations: • Healthy food should be everybody’s business, and we need to level the playing field for a fair food system. • Farming can be a force of change, with a transition to agroecology by 2030. • The countryside must work for all, with a land use framework to mediate all the demands placed on it. Alongside many others, in businesses, governments, NGOs and communities, we are working to resolve a critical challenge of our time – how to feed a growing population with nutritious food, affordably, and within ecological boundaries. There are no easy ‘silver bullet’ answers. Meeting the challenges, including reversing the damage caused by post-war industrialised agriculture and acting on the climate and nature emergencies, requires the shared perspectives, balanced enquiry and collaborative actions of all of us. This report forms part of a programme of work on changing food and farming systems in a thriving economy and for flourishing communities – from dietary shifts to healthy and affordable food environments, from the agronomics to the economics of sustainable farming, and a land use framework that ensures that the countryside can work for all. © Veronika Roosimaa FARMING SMARTER INVESTING IN OUR FUTURE | MARCH 2021 3 CONTENTS Contents Foreword 3 Executive summary 5 1 Introduction 8 2 Finance as a catalyst for change 10 2.1 Why agroecology is good business 11 2.2 The finance challenge: maximising opportunities 12 2.3 The case for a development bank 19 3 Designing an effective development bank 24 3.1 More than just a bank 25 3.2 Mission, ownership and structure 27 3.3 Governance and accountability 34 3.4 Distribution, lending model and products 38 3.5 Capitalisation and funding 43 3.6 Legal and accounting constraints 47 4 Conclusions and recommendations 51 5 Endnotes 54 List of figures Figure 1: Aggregate funding of UK agriculture 12 Figure 2: The UK’s ageing farmers 15 Figure 3: Eight agricultural system lock-ins 20 Figure 4: The interrelation of supply and demand for finance 21 Figure 5: Measuring what matters for sustainable food systems 27 Figure 6: Comparison of mission, vision and objectives of national development banks 29 Figure 7: Ownership and corporate structure of the British Business Bank and subsidiaries 33 Figure 8: KfW functional divisions 34 Figure 9: Illustrative balance sheet projection of the ADB 46 Figure 10: Classification of public bodies for national accounts 47 List of tables Table 1: Overview of national development bank governance 35 Table 2: Funding instruments used by national development banks in UK and abroad 41 Table 3: Funding sources of national development banks in UK and abroad 44 FARMING SMARTER INVESTING IN OUR FUTURE | MARCH 2021 4 FARMING SMARTER INVESTING IN OUR FUTURE | MARCH 2021 Executive summary © WLDavies EXECUTIVE SUMMARY Executive summary It is now generally accepted that swift and substantial change is needed in food, farming and land use, to address the climate and nature emergencies, the public health crisis and now a fair and green post-covid economic recovery. The Food Farming and Countryside Commission’s research demonstrates that a transition to agroecology could respond to these multiple challenges and allow farmers to grow enough nutritious and affordable food for a growing UK population, as well as supporting those farm businesses to thrive. Yet the practical realities of helping farmers make the transition are underdeveloped and the market alone is rarely capable of making the bold moves needed to accelerate change at the level it is needed. Under these circumstances, governments have, in the past, kick-started these vital transitions – to cleaner energy, housing and transport, and more. The same shift is now needed in agriculture. Agroecology, a nature-based solution to climate change, has immense potential Agroecology, a nature- to yield multiple benefits including more healthy, home-produced food, based solution to climate biodiversity restoration, ecosystem services and higher quality rural employment. change, has immense Although it has strong economic and business fundamentals, agroecology faces potential to yield multiple systemic barriers to adoption as well as shortfalls in provision of appropriate benefits including more finance. We conclude that a well-designed green finance intervention is required healthy, home-produced to realise this potential. food, biodiversity restoration, ecosystem In many cases farming businesses can access the bank finance they need, services and higher including to transform production methods. But there are also circumstances quality rural employment. in which banks may find it difficult to lend, including: 1. Lack of security – tenant farmers and/or farm contractors, who are unable to offer adequate security for loans 2. Smaller farms – for which transaction costs of lending are proportionately larger relative to loan size 3. New entrants – new farmers or succession within an established farm enterprise, where there is insufficient financial and management track record 4. Unfamiliarity – unfamiliarity with business models based on new farming methods that, although potentially well evidenced in general, lack a track record in a particular setting and so appear risky. In addition to these potential gaps, realising the full potential of agroecology will require broader transformation in the supply chain to stimulate and absorb more local food production. Furthermore, our analysis in our recent report, ‘Farming for Change’, demonstrated the productivity and environmental benefits of significant rebalancing away from intensive arable and livestock to mixed farms and increased horticultural production, and the requirement of a sustained phase of fixed and working capital investment over many years. FARMING SMARTER INVESTING IN OUR FUTURE | MARCH 2021 6 EXECUTIVE SUMMARY In view of this, we have explored the case for a new national development bank Agroecology is a science to support the UK agricultural sector. We conclude that there is a case for a new and a practice for institution to work with the grain of policy and market developments towards improving food and agroecology. We argue that: farming systems, which also pays attention to • The existence of positive environmental and social benefits justifies public the social and economic intervention, including in the financial sector to unlock new sources of finance. impacts for farmers, • Agroecology businesses are fundamentally bankable, but there are several growers, businesses, gaps in the supply of finance by deposit-funded retail banks that a national citizens, communities, and countries. In applying development bank can help overcome. ecological science to • A new mission-driven national institution can play a broader role in overcoming agriculture, it optimises ‘lock-ins’ that impede systems change, and it can drive a transition to agroecology beneficial relationships at the pace and scale required to meet the UK’s societal goals, in particular the between plants, animals, need to transition to a net zero carbon economy. humans, and ecosystems. As a global movement, • Measures to build demand for agroecological produce, to ensure that farmers helping achieve the UN have the information, advice and skills they need, and to spread awareness of Sustainable Development the full range of available finance are all equally as important as measures to Goals, it exposes the enhance the supply of finance. complexities of global agribusiness and supports Based on a review of national development banks across different sectors progress to a more and geographies, our initial recommendation is that the UK government should sustainable and fair establish a public development bank – the Agroecology Development Bank – food system. which would have a research and leadership role to develop the agroecology sector, stimulating demand for finance as well as ensuring sufficient supply of appropriate finance.